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How Business Accounting Works


Breaking the System Down

Now here are the steps that will follow:

Choose a starting point. Many new companies operate as a sideline before they are organized into a bona fide business. If this is your situation, you'll need to choose a starting point for your accounting system. Remember that you will need to record every transaction from that date forward, so don't go back too far unless absolutely necessary. If you are nearing your fiscal year, wait and start the new system with the new year.

Choose your accounts. Think of these in terms of assets and liabilities. Assets include checking and savings accounts, accounts receivable (money owed by customers), inventory, and even equipment that could be converted into cash. Liabilities include the money you owe to others (accounts payable), your credit card balance, and any other liabilities that are scheduled to be paid in following fiscal year (this could include sales tax, payroll taxes, insurance, etc.). Gather the following information:

Choose your accounts. Think of these in terms of assets and liabilities. Assets include checking and savings accounts, accounts receivable (money owed by customers), inventory, and even equipment that could be converted into cash. Liabilities include the money you owe to others (accounts payable), your credit card balance, and any other liabilities that are scheduled to be paid in following fiscal year (this could include sales tax, payroll taxes, insurance, etc.). Gather the following information:

  • Company legal name
  • Employee identification number (EIN) or your Social Security Number
  • The dates of your fiscal year
  • The type of forms you will use for your taxes (Accountant help may be needed here.)
  • Sales tax rates, if applicable
  • A list of items you will sell (products and services) including an ID number or name, the price or rate of what you sell, and whether what you sell is taxable (sales tax)
  • How you want to track sales -- by item, type of item, etc. (The guides that come with accounting software are helpful in this regard.)
  • (If you choose to track inventory) The cost of your inventory and the quantity on hand
  • A list of customers, addresses, phone numbers and e-mail addresses
  • A list of vendors with contact names, addresses, phones, and e-mail
  • The list of categories that you will use to track expenses - Some categories are pretty universal, like utilities and postage. Others will be particular to your business. If you have already been running your business as a sideline, look at the costs you have incurred and the categories into which they fall.

There are other questions you'll have to face that are related to accounting, but not strictly within the realm of setting your books. We have already mentioned the task of keeping the paper trail accessible. Filing can become an art form -- and a real sore spot if you don't do it well. You'll need to ask yourself how you plan to handle unpaid bills. How will you collect the money that your customers owe you? Remember the bride, Sally, in our early example. What if her mom didn't make that last payment and ignored your statements and calls?

That decision doesn't sound like fun, and maybe the other decisions you face and the gathering of all of this information still scares you. Most folks face this task with some sort of trepidation. But think of it as a creative process. After all, you are birthing a business. When your business is humming along with transactions sliding into their proper slots, you'll be able to click a button on your computer screen and get a picture, hopefully printed in black. You'll be able to smile and say, "Hey, that's my business!"


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